Last week we published our August monthly report. In short, we’ve had a cracking year.
Up 22% to the end of August, 10% per annum for the past two years and a healthy 4% per year ahead of the index since inception.
The message back to us, though, has been one of concern. We’ve had one redemption because the Fund is ‘too risky’ and a request from a long-time investor to ‘stop cocking things up’. Good advice, for sure. But much more difficult in practice than in theory.
The reactions are a consequence of us disclosing a loss on the Gunns FORESTS, a convertible note.
We bought the FORESTS in January of this year on the basis that a $150m capital raising and placement to Richard Chandler was going to make the convertible notes substantially more secure. The notes also contain a complicated conversion-into-equity mechanism that meant, for each $100 invested, you were going to end up with substantially more ordinary shares if you bought the convertible notes than if you bought the ordinaries directly. We bought some at $40 and sold a few at $65, but got stuck with the vast majority of the position when Chandler pulled the pin. Neither Gunns nor the FORESTS have traded again and it now seems they will never trade again.
Yes, it’s a ‘cock up’. We lost our investors money. But it’s what we do. We have made substantial amounts of money out of securities that could have gone the same way. BEPPAs for a start. Alinta Energy to second it. And ING Real Estate Community Living Group (now Ingenia) for final confirmation. We made more than 100% out of all of them, yet there was a chance with each, at the time of acquisition, that they could have been worth zero. We look for situations where the potential reward more than compensates for the risk, we manage our portfolio position accordingly, and we let the mathematics of probability work out in our favour over time.
The question is not whether we should be doing this type of investment. It is a space where we can clearly add value. The question is whether we should be telling you about it.
You might appreciate the level of disclosure. But that doesn’t mean it’s benefitting you or us.
One of the reasons people give us money to invest is so that they don’t have to deal with the stress. In Thinking Fast and Slow, Daniel Kahneman’s summary of a life’s research into human irrationality, he shows that we feel the pain of losses twice as much as we benefit from a commensurate gain. By telling you about our losses as well as the gains, you can end up with a net negative emotional response despite a positive overall return. That’s not a great outcome. Why not just wrap it up in one and deliver you the number?
We could just tell you the positive news. Standard industry practice really. But it’s going to look a bit weird when UXC is up 17%, IFN is up 36% and the unit price has barely increased. You don’t have to be Peter Higgs to work out something has gone wrong.
I haven’t reached a firm conclusion on this so am seeking your input. Currently, we have $55m under management in two funds we manage. Almost all of the growth is coming from performance. To grow it to the $150m we want invested in ASX listed stocks, we will need to distribute beyond the Intelligent Investor family. That’s not my preference, but a fact of life.
If the level of disclosure is causing problems in our little world, how will it go down on the outside? In this case at least, perhaps less really is more.
43 thoughts on “How Much Should Your Fund Manager Tell You?”
I am an investor in IIF and a very happy one thanks. There are so many fund managers out there that you need a point of difference from the crowd. Make you point of difference openness and honesty and it will reward you in the end. Cheers, Scott.
I concur with everyone above; your disclosures are a positive point of difference.
2 funds!!!!! why wasn’t i told…LOL…
please keep it open…i like to understand and to learn from the good and the bad.. plus your speciality (the beepas..the rhg’s etc) is the very reason we invest with you… we’d actually would like you to be even more vigorous with $$$ allocation to these unique opportunities…they are always roller-coasters and keeping us informed even when the ride crashes underpins our confidence in your ability and integrity…
I agree with everyone Steve. I am an IIF investor.
Your honesty is one of the reasons I invested. I’ve been an II subscriber for a long time and thought that your fund was a better way than doing it myself by cherry picking the II recommendations (which meant I didn’t get the diversification of winners & losers as you do).
Your style and methods are quite clear and so I’d expect investors to be able to handle the bad news with the good. As you say, that is exactly the point – we get some really good wins but have to accept some losses too. The net result is what matters.
I understand exactly where you are coming from. Firstly, let me say that I fully appreciate and expect full disclosure. I invest with you so that you can take the calculated risks that I am not competent enough to make. How else are we supposed to come across those once in a while RHG opportunities?
However, I appreciate that full disclosure may also have a negative effect on in flows and at the worst possible times may also cause outflows which can be value destroying when you are invested in small illiquid stocks. Most of the II family, I would imagine, would be able to cope with and appreciate full disclosure. This is why your fund was a rare stand out during the last drop when you were getting in flows when most others where selling stocks to cover redemptions (The luckiest Fund Manager). When opened up to a larger investor base not as well “prepared” for value investing this support through tough (and opportunistic) times may be less secure.
So overall I would love to see the full disclosure continue because in principle it is the right thing to do and it is just in your character. However, I do appreciate the challenges it throws up for a larger fund and the balance required. Large redemptions during severe market downturns would not be good for any of us. An interesting thought to ponder.
Like all before me, open and honest. It’s obviously what has attracted you your investors/subscribers/admirers. If you lose a couple along the way I’d suggest they didn’t fully appreciate the risk profile of the Fund in the first place and probably shouldn’t have been invested. Both the Fund updates and blog posts are always interesting and insightful reads.
While I don’t have anything invested in the fund, I am keen to invest some of my super funds. The current size of my super doesn’t warrant self-management – can we access the II Fund through any super providers or platforms?
Keep up the great work Steve.
We went through a similar discussion ourselves a few years ago and came to the conclusion of saying less than more purely for a number of reasons.
As one of the commenters suggested, in the space we trawl over you need every advantage you can find and telling others only increases the competition and being like minded investors they wiill probably react to the same trigger points that cause you to react in eiher buying or selling. 1300Smiles would probably fall into that basket.
We also had unitholders comment far more on what we should have done on our poor investmentsthan thank us for the good ones. Although we really only had 1 unitholder who gave us grief every time we issued an update: maybe he thought he was helping but it certainly didn’t feel that way.
So overall we took the decision of disclosing less (maybe to the detriment of the business) but I think we are no different to others in that the negative comments have a higher weighting in our minds than the positive ones and we don’t need that in the back of our minds when making decisions.
The concensus here seems to be you’re on the rit track so sounds like it’s your call.
If the problem is that people have an inapropriate reaction to bad news, why not remove their ability to react to information. Is there a structure where people can only redeem when in a position where they haven’t heard any recent bad news?
Buffett often refers to his investors as partners. Do you want partners in your fund who make decisions on fund managers based on a a single investment? If no, then set rules around the fund which obligate your partners to act in a certain way.
Yes, Steve I agree with all above, I am a fund member and glad to be so. I think an appropriate amount of disclosure for all investments, both good and not so good, is beneficial for all. I particularly agree with Wayne’s comment above that those who don’t understand and can’t appreciate the ups and downs of these types of investments, shouldn’t be in the fund and if they have left because of a few “cock ups” then you have done them a good turn by providing disclosure and making them realise this type of fund is not for them. They made the right decision (for the wrong reason)but this is where the honest approach pays off, you’re providing a good client service.
There is scuttlebutt that the staff room stocks tim-tams and nescafe gold.
I joined II and took matters into my own hands following horrid advice and management of funds. I resolved to be accountable for my own decisions.
So simply put – this is a trust issue. Disclosing the bad with the good helps the investor understand the manner in which the fund is operated and form a considered opinion of risk. To me, this is key. Like others, I follow your reporting and plan to migrate management to your fund in time.
More generally though to the issue of growth, is there an option for super to be managed through the IIF?
I enjoy the monthly reports for their insight. Of course you will make mistakes. Knowing how these have occurred is far better than assuming everything is always going swimmingly. It is a reshing change.
Hi Gavin, we are looking into an option via Netwealth that would allow people to allocate some super to the fund. At the moment, though, you can only invest in it if you have a SMSF.
I don’t care if you tell me absolutely nothing about the fund other than giving a yearly performance update. I trust the Intelligent Investor and for me that is the main thing. The main problem I have is getting the wife to let me take money out of term deposits and put more money in the fund!
Why don’t fund managers let you put a stop loss on your investment?
Another happy invester – keep up the great work! Agree strongly with everyone else – open disclosure!
I really appreciate your disclosure and candid commentary. It sets you apart form the rest, and I feel much more comfortable having you manage my money for that reason, as well as your obvious skills.
An added benefit is that because you are quite open about your process and some of the individual decisions you make, I learn a lot more about investing and portfolio allocation and I value this.
I would also like the option of investing some of my super with you so that option would be a great addition if you can make it happen.
Thanks again for your efforts
I’m an ii subscriber for a few years and have not as yet placed any funds with you though I see no reason not to place funds with you shortly. I took more responsibility over my own funds after the GFC made me have a closer look at what my former financial advisor was doing. Your credibility and openness would make you one of the few I’d feel happy investing with. Not sure how often you make updates but if they’re monthly then maybe you should make them quarterly and even then you can delay release of details so that any news is “old news” and leaves no reason for investors to knee jerk react on your disclosure.
I would want details disclosed but my investment in a fund is long term and I should not be reactive to the ups and downs of the market of the day/month while being informed of how you operate would ensure I didn’t feel like I had invested in one of the many black hole funds I’ve had before.
Nice post Steve, and wonderful, reassuring feedback from everyone. Echoing Wayne’s comments, I’d keep tight-lipped about things when you think it could lead to an actual financial disadvantage for investors (in missed opportunties etc). But, more generally, your current approach is fairly unique and obviously appreciated judging by these comments. Perhaps an extra line or two in the monthly report on Gunns—saying this was one of those weighted coin toss punts that we do well from on average but not all the time—would have averted the controversy. The line you did include was perhaps too much of a throw-away line and perhaps in the wrong spot (end of the review)?
Seth Klarman says that his patient investor base is one of his greatest competitive advantages. Maybe this sort of situation is another filter against the wrong sort of investor (wrong for IIVF, but each their own). It might take longer to get to $150m, but the investors that back you are less likely to ditch you if you have a bad or even horrible year, as is wont from time to time.
Congratulations on the excellent performance. Being open and honest about where things did and where they did not work out is a real virtue in this business. How else would we be able to understand where the returns come from and make an informed decision whether to invest in the fund? This sets you apart in a positive way.
I would have invested with IIF from the outset (as I share your investment philosophy), were it not for the fact that you apparently cannot take foreign-based private investors on board. Here’s hoping that might change some time in the near future. Keep up the good work!
The reason I subscribe to II and have an amount in the value fund is to learn. Period.
The main lesson so far has been what many investors, traders and gamblers all tell you. Manage your losses and the winners take care of themselves.
Bad things happen. Unless your mind is in la la labd.
Let’s bring in a bit of pop psychology, Steve.
Why don’t you make a pre-requisite for members to download a copy of your latest update for them to advise their satisfaction with your fund to date, across any number of measures of your choice.
Altho I am not a member, I also suggest that you disclose edited snippets of your updates (if not been done already) for the public to get a sample of your style, and disclosing recent matters as they were, stains and all, to signed in members only.
I wonder if you feel the negative comments more than the positive ones. You probably got twice as many positive as negative comments for your outperformance. Yet you feel the negative ones more. Sound familiar ?
please keep up the awesome work of full disclosure!
Remain the point of difference, the contrarian approach is the point of difference which marks the II name
Provided you decide to keep the openness I will shortly become an investor – I have been watching and assessing for a while – and this event, for some reason, has had a psotive impact on my confidence in investing.
As most others have said keep up the honest open disclosure and dont worry about the small numbers of complaints. Just wondering why do you want to get to $150M invested?
I assume the $150m is the amount required to make the fund viable as a business – or at least sufficiently profitable for Steve to consider it worth his while.
Comment while you’re looking to grow beyond the II family. The first info page on the fund (http://www.iifunds.com.au/value-fund) has this as the second sentence:
“The Value Fund was set up to provide members of Intelligent Investor with access to smaller, more complicated opportunities than those available in the newsletter.”
It’s true, but if I’m not an II member it makes me question whether this fund is meant for me. Probably not your aim.
On disclosure: keep it up. Use it as a point of difference.